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Press Release: Statement at the Conclusion of the IMF Staff Mission to Sri Lanka

June 10, 2011

Press Release No. 11/227
June 10, 2011

The Executive Board of the International Monetary Fund (IMF) took the decision in April to shift from quarterly to semi-annual reviews under the US$2.5 billion Stand-By Arrangement with Sri Lanka, which was approved on July 24, 2009. Consistent with this, a staff mission led by Brian Aitken visited Colombo May 31-June 10 to conduct discussions in the lead-up to a mission for the seventh review under the program expected in September. The team met with government and Central Bank officials, as well as representatives of civil society and the private sector. The team issued the following statement today at the conclusion of its visit:

“The macroeconomic situation is satisfactory. Economic growth slowed somewhat in the first quarter of this year reflecting flood-related damage, but leading indicators suggest that growth is currently strong across all sectors. Inflation is expected to remain in single digits as food prices have begun to decline.

“The tax reforms initiated in the 2011 budget have been implemented, tax revenue is strong, and fiscal performance to date remains consistent with the government’s 2011 deficit target of 6¾ percent of GDP. The government has appropriately shifted investment promotion away from granting tax concessions. More steps need to be taken to institutionalize this policy by revising investment guidelines and regulations to provide more clarity to prospective investors while safeguarding tax revenue.

“Private sector credit growth has been rapid, but from a low base, and there are not yet signs of demand-driven inflationary pressures. The central bank should, however, be on the lookout for signs of overheating, and be prepared to adjust monetary policy accordingly. Banks and finance companies should also guard against a relaxation of lending standards and the accompanying risk of non-performing loans.

“Strong export growth and continued large remittance inflows have supported reserves, but going forward, rapid import growth and high oil prices could put pressure on the balance of payments. In this event, the central bank should allow the exchange rate to reflect market forces flexibly and avoid sustained sales of foreign exchange, ensuring that reserves remain healthy and the economy competitive.

“Sustained higher economic growth will require an environment more conducive to domestic and foreign investment. The government has started a comprehensive process to address legal and bureaucratic barriers to investment and the high cost of doing business in Sri Lanka. Increased transparency and improved governance could also bolster market confidence and lead to higher investment. However, there is a perception that the government is sending some potentially conflicting signals about the role of the private sector in economic development. This could be deterring investment and should be addressed.”